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GET OUT OF DEBT
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How To
call and ask for a reduction in the interest rate or perhaps to
have late fees and over-limit fees that might have been
charged to your account waived. The worst that could
happen is that theyll say no.
MAKE POWER PAYMENTS
TO GET OUT OF DEBT FAST
Make a commitment to pay the same amount towards debt
reduction each month until you are debt free. For example,
if you have five credit cards and have been paying each
creditor $50 a month, continue to pay $250 each month until
you are completely debt free. Instead of paying a little extra
on each of your credit cards, make only the minimum
payment on all your debts but one, and apply every extra
penny you can find to one power payment. You will save
more in finance charges and pay your debts off faster if you
apply the power payment to the debt with the highest
interest rate. Sometimes its worth selecting the loan with
the lowest balance or shortest term for the power payment
to get a quick pay-off from eliminating one of your debts.
Once you pay off the first debt, add the payment you
were making to that creditor to the payment for the debt
with the next highest interest rate. You can turbo charge
your power payment by coming up with additional dollars to
devote to your debt repayment plan. The larger your
payment, the quicker that debt will be paid and the less
interest you will pay. Consider applying a portion of your tax
refund, annual bonus, gifts you receive or other windfalls to
your power payment for even greater savings.
Getting out of debt is one of the smartest investments
you can make. Once you are debt free, you will have the
amount of your regular debt payment to use for other
things. Since you are already used to doing without the
money, consider saving all or part of it each month. Its a
good idea to have three-to-six months of living expenses
set aside for emergencies. When youve reached that goal,
you can use the money for other important goals such as a
childs education or your own retirement.
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Credit cards and loans offer an easy and
convenient way to buy the things you need
now and pay for them later. Its almost
impossible to survive today without a credit
card. Credit cards make it easier to reserve
hotel rooms and rental cars, and are a safer
way to order goods online or through the
mail. One downside is that the ready
availability of credit may make it easier to
borrow more than you can afford to repay in
a reasonable amount of time. Too much debt
can mean that most of your income goes for
debt payments instead of for current
purchases and saving for future needs.
There are good and bad uses for credit. A good use is
conveniencemeaning you pay the balance off in full every
month, thereby avoiding finance charges. Another good use
is to finance an asset, such as a college education or a home,
or a durable good such as an appliance or furniture. When
you use credit, make sure its for a good reason. Used wisely,
credit is a valuable tool to help you reach important goals.
Using a major credit card (i.e. Visa or Mastercard) to buy
big-ticket items may provide additional protections. If you
have a problem with your purchase of more than $50 from a
retailer in your home state (or within 100 miles), paying with
a credit card allows you to dispute the charge and withhold
payment until the problem is resolved. However, using a
credit card rather than an installment loan for a major
purchase may mean a longer repayment period and higher
finance charges.
Many people find that the more they use credit, the more
they need to use credit in order to make ends meet. Fall
behind on payments and credit becomes even more of a
GET OUT OF DEBT
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The University of Georgia and Ft. Valley State University, the U.S.
Department of Agriculture and counties of the state cooperating. The
University of Georgia Cooperative Extension and the Colleges of Agricultural
and Environmental Sciences & Family and Consumer Sciences offer
educational programs, assistance and materials to all people without regard
to race, color, national origin, age, sex or disability.
AN EQUAL OPPORTUNITY EMPLOYER/AFFIRMATIVE ACTION
ORGANIZATION
COMMITTED TO A DIVERSE WORK FORCE
HACE-E-42
October 2006
Issued in furtherance of Cooperative Extension work, Acts of May 8 and
June 30, 1914, The University of Georgia Colleges of Agricultural and
Environmental Sciences and Family and Consumer Sciences and the U.S.
Department of Agriculture cooperating.
Dr. Scott Angle,
DEAN AND DIRECTOR
Michael Rupured, M.S., AFC
SENIOR PUBLIC SERVICE ASSOCIATE AND
EXTENSION CONSUMER ECONOMICS SPECIALIST





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problem as additional finance charges and late fees
accumulate. On top of the additional fees, you may see your
interest rates (and payments) go up. Its important to
understand that paying only the minimum payment printed
on the credit card statement will mean staying in debt for a
long, long time. The longer it takes you to repay a debt, the
more you will have to pay in interest.
For example, if you owe $1,000 on a credit card with an
Annual Percentage Rate (APR) of 18%, how long will it take
you to pay off the credit card? Pay only the required 2%
minimum payment and it will take 19 years and 4 months to
pay off the balance, and you will pay an additional $1,931 in
interest. Stick with the $20 per month payment required
with a $1,000 balance, and it will take 7 years and 2 months
to pay off the card, and you will pay more than $860 in
interest. If you increase your payment to $50 per month, it
will take only 2 years to pay off the card and you will pay
less than $200 in interest.
Many creditors want you to make only the minimum
payment because doing so generates a lot more interest
income for them. When a creditor allows you to skip a
payment (such as when you paid more than the minimum
amount on the last bill or occasionally, around the holidays
as a special gift for being such a good customer), they
arent doing you any favors because interest still
accumulates. Paying off credit card debt as fast as you can
will save you money.
Getting out of debt has other benefits as well. Being debt-
free makes you more financially secure, and helps you to
focus more on your financial future. It also creates flexibility;
the debt payments you used to make are now available for
other purposes. Reducing or eliminating your debt may also
improve your credit score, making it cheaper to borrow in
the future, should the need arise. Paying off your debts is a
wise investment that will pay off for years to come.
TYPES OF CREDIT
There are many ways to categorize credit. The most
important considerations focus on the terms (installment
versus revolving) and whether or not there is collateral
(secured versus unsecured) associated with the debt.
Installment credit is usually associated with the purchase of
an item, such as furniture, where you make a monthly
payment for some period of time, such as 12 months (or
more) until the balance is zero. You cant add new charges so
the balance goes down with each payment. With installment
credit, you can determine in advance the total amount to be
repaid and how much of that total will be interest.
With revolving credit, you pay a percentage of the balance
each month. You can continue to add new charges up to your
credit limit as long as you make at least the regular monthly
minimum payment. The interest rate may go up or down,
depending on how you repay the debt and other factors.
Secured debt is tied to some form of collateral. In most
cases, the collateral is the item purchased with credit, such
as a home, vehicle, furniture, or appliance. If you dont
make payments for a secured debt, the creditor will
repossess whatever collateral was offered. If the debt was
secured with a cosigner, the creditor will contact the
cosigner for payment. In the event you decide to file for
bankruptcy, secured debts are higher priority than
unsecured debts.
With unsecured debt, there is no collateral. Examples of
unsecured debts include medical bills, most credit cards
(unless a deposit equal to the credit limit is required to open
the account), and money you owe to family members or
friends. If you file for bankruptcy, unsecured creditors are the
lowest priority for repayment, and hence, the most willing to
work with you when you run into trouble paying your bills.
Unsecured creditors are often the first to call when you miss
a payment. If you are unable to make all your payments,
unsecured creditors should be lower priority for repayment
than secured creditors. However, missing a payment to an
unsecured creditor does affect your cre